Innovation versus technology imitation development strategy: what influences government decision?

ABSTRACT This paper investigates the effect of state-business relations (SBR) and institutional settings on government decisions to foster innovation in developing countries. It differentiates between informal SBR-based cronyism and formal SBR-based lobbying and how they could influence a government’s decision to implement policies fostering innovation. After a theoretical discussion on the available literature, a theoretical model building on and complementing the Aghion and Howitt (2009) growth model with institutions is introduced. The model provides predictions on which institutional settings induce the government to support innovation, rather than technology imitation/transfer strategies. Using the random-effects regression model, the empirical results support some of the model’s predictions. This includes the negative effect of cronyism and the positive effect of public frustration from cronyism on choosing the innovation strategy. A positive effect also results from a situation where natural resources-caused economic growth is matched by institutional reform that curbs cronyism and mitigates the resource curse. A short discussion on some case studies follows before the paper ends with a conclusion.